IPPR Trans-Atlantic Business and Climate Change Dialogue:

1.Climate change - worrying isn’t it? Talk is of melting ice caps, violent weather extremes, rising sea levels. For investors looking for safe harbours in which to shelter their funds, global warming has introduced an unwelcome extra element of unpredictability.

2.There is now consensus that climate change presents the world with a very great challenge - how to wean ourselves from using hydrocarbons – to create a low carbon world. Think of it as the greatest challenge to be put since President Kennedy initiated the space race.

3.That bold aim - seemed to many, impossible at the time. But the challenge galvanized the USA to action and the impossible became a giant leap for mankind. The race acted as a catalyst for the microchip electronic revolution, and the whole world has benefited as a result. Why shouldn’t a similar leap be achieved for Climate Change?

Business Engagement

4.Earlier this year the Gleaneagles summit concluded with an ambitious communiqué. This covered agreement from all members on the need for urgent action on climate change. This included a new Dialogue between the G8 and other interested countries with significant energy needs, on climate change, clean energy and sustainable development. Last week the UK hosted the first ministerial meeting of this Dialogue.

5.The meeting shaped the further work to be carried out by the partner countries and international and regional institutions. As part of the engagement of business in the G8 process, Alan Johnson & Margaret Beckett recently hosted a two day business conference that included 300 business leaders from around the world.

6.The message we have received from business was that climate policies should be “long, loud and legal”. They must be long-term to drive the capital investment required to move us towards a low carbon economy; loud enough to be heard above the other important corporate and social responsibility issues; and legal in terms of being underpinned by regulation.

7.Our message for business is to accept the world is becoming carbon constrained – and this means that business needs to become carbon constrained too.I am encouraged by the level of engagement of business on both sides of the Atlantic on the importance of tackling climate change.

8.Major US companies such as GE and Cinergy – to name two of many – have stated their commitment to the cause, with GE recently launching its “Ecomagination” initiative. Cinergy’s Jim Roberts stated in a recent BBC interview that “the debate about science is over”, and highlighted the importance of business taking a leadership role, encouraging customers to change their behaviour.

9.Many companies are directly tackling their own greenhouse gas emissions through energy efficiency. This makes good business sense – using less energy costs less and improves shareholder value. A prime example of this is Dupont, who set themselves a target of reducing greenhouse gases to 65%of their 1990 levels by 2010.

10.In fact they had achieved a 72% reduction by 2003. During the same period, Dupont saw a decline of 7% in their energy consumption despite a 33% increase in production.d energy efficiency – Some companies are going further, offsetting their unavoidable emissions through carbon offsetting. HSBC announced this year that they are to become the world’s first carbon-neutral bank. The direction of travel is clear.

Climate Change Risk Management for Investors

11.Investors also have a role to play. You need to consider the risk climate change poses to your investments and ensure that the businesses you invest in have contingency plans in place. If you know of firms that have not factored in this risk you have a responsibility to persuade the Board of its importance.

12.Issues you will wish to consider are: -

  • The Threat of rising energy prices – Energy prices are currently rising significantly and industry is expressing concern at the impact on its international competitiveness. The Government recognises that increases in energy prices are unwelcome to industry. However, these increases are in the main from historically low levels.
  • Emissions trading- allowing companies to buy and sell permits for CO2 emissions to deliver reductions at the lowest cost - is now a reality in Europe. In the future further phases may bring other industry sectors – or gases within the scheme. The message is clear: emissions trading is here to stay. There is now a price for carbon and you need to think about the implications - and opportunities - for your business.
  • Carbon Risk – Investors are increasingly aware of the need to address company carbon risk profiles. The importance of carbon risk has been highlighted by the Carbon Disclosure Project, which facilitates the world’s largest institutional investor collaboration on the business implications of climate change. The coalition now has combined assets of more than 21 trillion dollars, underlining just how seriously the issue is being taken by major companies.
  • Insurance risk - Depending on the amounts of greenhouse gases emitted and the sensitivity of the climate system, global temperatures could increase by between 1.4 to 5.8 °C over the next 100 years. Hotter summers and wetter winters are to be expected. Sea levels will continue to rise resulting in an increased likelihood of coastal flooding.

13.Weather extremes carry significant costs. The European floods of 2002 and heat-wave of 2003 likely caused some 30,000 early deaths and had an estimated direct cost of nearly $30billion in total.

14.Claims for storms and flood damages in the UK have doubled to over £6 billion over the period 1998-2003, compared to the previous five years, with a prospect of a further tripling by 2050. According to Munich Re, the economic and insured losses due to natural and weather-related events in 2004 amounted to over US$100billion.

Opportunities for investors - New Energy Technologies

15.However, with challenge and risk comes opportunity. The new technologies that will need to be developed to meet the challenge of Climate Change will provide new investment opportunities. Let me talk a little about some of those we have already identified.

Joint Implementation projects and Clean Development Mechanisms

16.The UK Government is fairly unusual in the developed world in leaving involvement in the Kyoto Flexible Mechanisms market (The Clean Development Mechanism (CDM) and Joint Implementation (JI) projects, and international emissions trading) solely to the private sector.

17.This bold step has led to Britain leading the world in financing, facilitating and developing climate change projects (particularly under the CDM). Key successes to date include:

  • UK companies are responsible for developing the first CDM projectsin India, China AND Brazil (the 3 biggest CDM project markets in the world).This includes both the world's first CDM project (in Brazil) and the biggest (in India)
  • These projects are being developed to supply demand in the EU Emissions Trading Scheme and from national carbon funds (including Japan and Canada). The City of London has become the world's pre-eminent emissions trading centre and it’s share of theCDM projectinvestment market has doubled over the last year (from 6%to 12% of world activity).
Renewables

18.The UK’s target of 10% of electricity from renewable sources of energy by 2010 is ambitious. But we are determined to do all we can to get as close as we can to the target. With the introduction of the Renewables Obligation in 2002, which requires electricity suppliers to source an increasing proportion of the electricity from renewable energy, there has been a significant step change in the number of renewables projects that have been built – for example, we estimate that more than 500MW of wind capacity will be installed in 2005, double that for 2004 – itself a record year. And in June this year the UK broke the gigawatt barrier for the amount of electricity derived from wind.

Carbon Abatement technologies

19.But it is also clear that fossil fuels will continue to be the main energy source worldwide for many years. Indeed, countries such as China and India will increase their reliance on coal as their power and industrial bases expand.

20.Some of our work in progress includes a Carbon Abatement Strategy for Fossil Fuel Use. We analysed the potential for cleaner coal and CO2 capture and storage technologies. The conclusion was that there was great potential. Alongside this we have our Hydrogen Strategy.

21.This will include demonstration programmes for hydrogen and fuel cells, and the establishment of a hydrogen coordination unit. We have taken steps to capitalise on this potential by launching a £40 million funding package for demonstration projects of Carbon Abatement, Hydrogen, and Fuel Cell technologies over the next three to four years.

Concluding Remarks

22.Let me finish by repeating that climate change is real and for business it provides challenges and risks but also opportunities. With the engagement of business I know that the world can rise to meet this truly global challenge – make sure you have the vision to invest in a low carbon future now. Thank you.

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